Oil bulls headed over demand cliff as refinery shutdowns loom

Gas oversupply curbs operations

By Mark Shenk, Bloomberg News

July 29, 2016

Photo: Bob Owen /San Antonio Express-News

With weekly Energy Information Administration data showing U.S. gasoline stockpiles at the highest seasonal level since at least 1990, refiners may shut sooner and for longer ahead of the Labor Day holiday in early September, the end of the driving season.

With weekly Energy Information Administration data showing U.S....

Beware, oil bulls: Just as U.S. oil production sinks low enough to drain supplies, demand is about to fall off a cliff.

American gasoline consumption typically ebbs in August and September as vacationers return home, and refiners use that dip to shut for seasonal maintenance. Over the past five years, refiners’ thirst for oil has dropped an average of 1.2 million barrels a day from July to October.

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“People are looking ahead to the fall and are worried,” said Michael Lynch, president of Strategic Energy & Economic Research in Winchester, Massachusetts. “There’s more and more talk of prices going south of $40, and as a result, people are going short.”

Money managers added the most bets in a year on falling West Texas Intermediate crude prices during the week ended July 19, according to Commodity Futures Trading Commission data.

With weekly Energy Information Administration data showing U.S. gasoline stockpiles at the highest seasonal level since at least 1990, refiners already have started reducing their operating rates, which had been at the highest level of the year. U.S. refiners usually don’t begin to curb processing until August as the summer driving season nears its end.

“With gasoline supplies the highest since April, refiners may pull some projects forward,” said Tim Evans, an energy analyst at Citi Futures Perspective in New York. “This will take more support away from the market and add to the broader problem of excess supply.”

The global oil market is “severely oversupplied” with gasoline, which will weigh on crude prices, according to Morgan Stanley analysts led by Adam Longson. Refineries have been processing too much gasoline in recent months, according to the report published last week. Faced with the need to cut back operations to protect profit margins, refiners are set to reduce crude purchases and drag prices lower, the analysts say.

“If we’ve gone through the bulk of the summer driving season and haven’t done much damage to gasoline supply, refiners are going to react,” said Michael D. Cohen, an analyst at Barclays PLC in New York. “It will be hard to find investors that are willing to go long.”

The Organization of Petroleum Exporting Countries boosted production 0.7 percent to 32.9 million barrels a day in June, according to estimates compiled by Bloomberg. Russian output will climb by 590,000 barrels a day over the next three years to exceed the former Soviet record, Goldman Sachs Group Inc. said this month.

On Wednesday, the EIA reported that U.S. crude stockpiles unexpectedly had climbed during the week ended July 22, halting a nine-week streak of declines, the longest streak in data going back to 1982.

In addition, U.S. oil explorers have boosted the number of active rigs by 58 since the start of June to 374, according to Baker Hughes Inc.